Government Seeks Denial of Petition to Quash IRS Summons

CLAUD CLARK III,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF ALABAMA
NORTHERN DIVISION

UNITED STATES' MOTION FOR SUMMARY DENIAL OF CLARK'S PETITION TO QUASH

Claud Clark initiated this case, asking the Court to quash an administrative summons issued to the Alabama Real Estate Appraiser's Board by the Internal Revenue Service as part of the IRS's examination of Rock Spring LLC's tax return for the tax year ending December 31, 2016. However, as explained in more detail in the United States' memorandum of law in support of this motion, the United States has demonstrated a prima facie case for enforcement of the summons. Clark alleges that the IRS issued the summons for an “improper purpose,” and that the summonsed documents and information are not relevant to the IRS's examination. But Clark's allegations lack merit and constitute conjecture coupled with factual misrepresentations.

Because the United States can demonstrate a prima facie case for enforcement of the summons and because Mr. Clark cannot disprove one of the four elements of the United States' prima facie case or otherwise show bad faith, this Court should summarily deny Mr. Clark's petition to quash the IRS summons.

The reasons for this motion are more fully set forth in the United States' memorandum of law, filed herewith.

WHEREFORE, the United States respectfully requests this Court summarily deny Claud Clark's petition to quash IRS summons.

Dated: March 19, 2020

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

ERIN R. HINES
Florida Bar No. 44175
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 7238
Washington, D.C. 20044
202-514-6619 (v)
202-514-6770 (f)
Erin.R.Hines@usdoj.gov

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UNITED STATES' BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY DENIAL OF THE PETITION TO QUASH

The IRS is examining Rock Spring's tax return (Form 1065) for the tax year ending December 31, 2016 to determine its correctness. More specifically, the IRS is examining whether Rock Spring properly reported and substantiated a non-cash charitable contribution deduction of $23,560,000 from the donation of a fee simple interest in certain real property in Alabama. During its examination, the IRS learned that petitioner Claud Clark appraised the real property and prepared an appraisal that Rock Spring attached to its tax return to support the claimed deduction. During the examination, the IRS also learned that Clark surrendered his appraiser license in Alabama in response to a disciplinary proceeding initiated by the Alabama Real Estate Appraisers Board. Because Clark's licensure status as well as the documents and information maintained by the Alabama Real Estate Appraisers Board for the disciplinary proceeding may shed light on whether Rock Spring properly reported and substantiated the non-cash contribution deduction, as described in more detail below, the IRS issued a summons to the Alabama Real Estate Appraisers Board for such information and documents.

After being notified of the summons, Clark filed this petition to quash the IRS summons issued to the Alabama Real Estate Appraisers Board. In doing so, Clark must meet a “heavy burden” to disprove one of the elements of the United States' prima facie case for enforcement of the summons or otherwise show that the enforcement of the summons would be an abuse of the court's process. But Clark's petition does neither. Instead, his petition is riddled with misrepresentations, untruths, and baseless speculation – which falls woefully short of the “heavy burden” he must meet. As such, the Court should summarily deny Clark's petition to quash.

FACTS

1. On or about March 6, 2019, the IRS began a civil examination of Rock Spring, LLC (“Rock Spring”) for tax year ending December 31, 2016. IRS Revenue Agents Linda Freeman and Benjamin M. Brantley are assigned to the IRS's examination of Rock Spring. (Decl. of IRS Revenue Agent Linda Freeman (“Freeman Decl.”) ¶¶ 3-5; Decl. of IRS Revenue Agent Benjamin M. Brantley (“Brantley Decl.”) ¶¶ 3-5).

2. IRS Revenue Agents Freeman and Brantley are duly commissioned Revenue Agents employed in the Large Business and International Division of the IRS with posts of duty in Atlanta, Georgia. (Freeman Decl. ¶ 1; Brantley Decl. ¶ 1).

3. IRS Revenue Agents Freeman and Brantley are authorized to issue IRS summonses under 26 U.S.C. § 7602 and 26 C.F.R. § 301.7602-1 (Freeman Decl. ¶ 2; Brantley Decl. ¶ 2).

4. The IRS is examining Rock Spring's federal income tax return (Form 1065) for tax year 2016 to determine the correctness of the return. In particular, the IRS is examining and determining whether Rock Spring properly reported and substantiated a non-cash charitable contribution deduction in the amount of $23,560,000 for tax year ending December 31, 2016. The non-cash contribution resulted from Rock Spring donating certain real property constituting 121 acres located in Morgan County, Alabama (“121 Acres”) to Foothills Land Conservancy. (Freeman Decl. ¶ 6; Brantley Decl. ¶ 6).

5. To claim a non-cash charitable contribution tax deduction of over $5,000, taxpayers must obtain a “qualified appraisal” from a “qualifier appraiser.” 26 U.S.C. § 170(f)(11)(A), (C). The qualified appraisal must be attached to the return for the taxable year in which such contribution is made. Id.

6. During the course of the IRS's examination, Revenue Agents Freeman and Brantley learned that Clark appraised the value of the 121 Acres for Rock Spring and prepared an appraisal that Rock Spring attached to its tax return for tax year ending December 31, 2016. (Freeman Decl. ¶ 7; Brantley Decl. ¶ 7).

7. During the course of the IRS's examination, Revenue Agents Freeman and Brantley learned that the Alabama Real Estate Appraisers Board filed a complaint against Clark and initiated a disciplinary proceeding. Revenue Agents Freeman and Brantley also learned during the examination that Clark surrendered his appraisal license in Alabama in connection with that disciplinary proceeding. (Freeman Decl. ¶¶ 7, 8; Brantley Decl. ¶¶ 7, 8). 

8. During the examination, Revenue Agent Brantley attempted to obtain the documents from the Alabama Real Estate Appraisers Board informally but was unsuccessful. (Brantley Decl. ¶ 9).

9. On December 19, 2019, in furtherance of the IRS's examination of Rock Spring and in accordance with 26 U.S.C. §§ 7602, 7603, and 7609, Revenue Agent Freeman issued an IRS summons to the Alabama Real Estate Appraisers Board, directing it to appear on January 17, 2020, at 11:00 a.m., at the IRS office in Atlanta, Georgia, before Revenue Agent Brantley for the purpose of giving testimony and producing records about the complaint and disciplinary actions against Clark by the Alabama Real Estate Appraisers Board. (Freeman Decl. ¶ 9; Brantley Decl. ¶ 10).

10. In particular, the IRS summons requested a complete copy of any case file maintained by the Alabama Real Estate Appraisers Board with respect to Clark, including, but not limited to the following documents and information:

11. In accordance with 26 U.S.C. § 7603(a), on December 19, 2019, Revenue Agent Brantley personally served an attested copy of the IRS summons described above in paragraph 10 on the Alabama Real Estate Appraisers Board and a representative of the Alabama Attorney General's Office who was present at the office of the Alabama Real Estate Appraiser Board. (Brantley Decl. ¶ 11)

12. In accordance with 26 U.S.C. § 7609(a)(1), on December 20, 2019, Revenue Agent Brantley sent by certified mail notices of the summons described in paragraph 10 above to Rock Spring and Clark. (Brantley Decl. ¶ 12).

13. To date, the Alabama Real Estate Appraisers Board has not complied with the IRS summons served on it. (Freeman Decl. ¶ 10; Brantley Decl. ¶ 13).

14. The December 19, 2019 IRS summons seeks relevant information that may shed light on the correctness of Rock Spring's 2016 tax return. Specifically, the records and testimony summoned may shed light on whether Clark was a qualified appraiser, whether Clark prepared a qualified appraisal, and/or the appropriateness of Clark's appraisal methodologies and valuation. It is necessary to examine the testimony, books, papers, records, or other data sought by the summons in order to properly examine the correctness of Rock Spring's 2016 tax return. (Freeman Decl. ¶ 11; Brantley Decl. ¶ 14).

15. The IRS is not already in possession of the records sought by the summonses issued to Alabama Real Estate Appraisers Board. (Freeman Decl. ¶ 12; Brantley Decl. ¶ 15).

16. There is no “Justice Department referral,” as defined by 26 U.S.C. § 7602(d), in effect with respective to Clark or Rock Spring. Specifically, no recommendation has been made by the IRS to the Department of Justice for a grand jury investigation or criminal prosecution of Clark or Rock Spring. Additionally, no request has been made under 26 U.S.C. § 6103(h)(B)(3) for the disclosure of any return or return information in connection with a grand jury investigation or potential or pending criminal investigation of Clark or Rock Spring. (Freeman Decl. ¶ 13; Brantley Decl. ¶ 16).

17. All administrative steps and procedures required by the Internal Revenue Code (26 U.S.C). were followed and have been taken with respect to the summonses described above. (Freeman Decl. ¶ 14; Brantley Decl. ¶ 17).

ARGUMENT

The Internal Revenue Code (26 U.S.C). directs the Secretary of the Treasury to make inquiries into the tax liability of every person who may be liable to pay any internal revenue tax. 26 U.S.C. § 7601. To that end, the IRS has broad power to inquire as to all persons who may be liable to pay any internal revenue tax and examine each taxpayer's compliance with the Internal Revenue Code. See United States v. Clarke, 573 U.S. 248, 249-50 (2014). The IRS is authorized to issue summonses to ascertain the correctness of a tax return, to determine the liability of a person for any internal revenue tax, or to collect a tax liability. 26 U.S.C. § 7602(a); see also United States v. Bisceglia, 420 U.S. 141, 145 (1975) (“Thus, § 7601 gives the Internal Revenue Service a broad mandate to investigate and audit 'persons who may be liable' for taxes and § 7602 provides the power to 'examine any books, papers, records, or other data which may be relevant . . . (and to summon) any person having possession . . . of books of account . . . relevant or material to such inquiry'”). The Supreme Court recently reemphasized: “The purpose of a summons is 'not to accuse,' much less to adjudicate, but only 'to inquire.' And such an investigatory tool, we have recognized, is a crucial backstop in a tax system based on self-reporting.” Clarke, 573 U.S. at 254 (quoting Bisceglia, 420 U.S. at 146).

I. The United States has established a prima facie case for enforcement of the summons.

Summons proceedings — including a petition to quash an IRS summons — are “summary in nature.” Clarke, 573 U.S. at 254. In a proceeding that addresses the merits of the issuance of an administrative summons, the United States must establish a prima facie case for enforcement of the summons by establishing four elements, commonly referred to as the Powell factors:

United States v. Powell, 379 U.S. 48, 57-58 (1964); United States v. Leventhal, 961 F.2d 936, 939 (11th Cir. 1992); see also, Azis v. United States, 522 Fed. App'x 770, 773 (11th Cir. 2013).

The Powell prima facie test only imposes a “minimal burden” on the government. See United States v. Morse, 532 F.3d 1130, 1132 (11th Cir. 2008) (characterizing the IRS's burden as “minimal”); In re Newton, 718 F.2d 1015, 1018-19 (11th Cir. 1983) (characterizing the IRS's burden as a “minimal showing”). The United States may satisfy its minimal burden “merely by presenting the sworn affidavit of the agent who issued the summons attesting to the[ ] facts.” United States v. Medlin, 986 F.2d 463, 466 (11th Cir. 1993) (quoting La Mura v. United States, 765 F.2d 974, 979 (11th Cir. 1985))); see also Clarke, 573 U.S. at 250, 254.

Here, the United States has established a prima facie case for enforcement of the summons through the declarations of Revenue Agents Freeman and Brantley, which are attached hereto as Exhibits 1 and 2. Specifically, the declarations establish the following Powell elements:

Taken together, the United States has established its prima facie case for enforcement of the summonses at issue.

II. The Court Should Reject the Petitioner's Grounds to Quash the IRS Summonses at Issue and Deny the Petition.

Once the United States establishes its prima facie case, the burden shifts to the petitioner to disprove one of the Powell factors or showing that enforcement of the summons would be an abuse of the court's process. United States v. Stuart, 489 U.S. 353, 360 (1989); La Mura v. United States, 765 F.2d 974, 979–80 (11th Cir. 1985); see also United States v. Clower, 666 Fed. App'x 869, 873 (11th Cir. 2016). In other words, the burden of proof which shifts to the petition is “a heavy one.” United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316 (1978) (“Without a doubt, this burden is a heavy one.”); see also United States v. Clarke, 816 F.3d 1310, 1315-18 (11th Cir. 2016).

To rebut the United States' prima facie showing, Clark must present specific facts or circumstances from which a court may plausibly infer that some wrongful conduct by the Government exists. See Clarke, 573 U.S. at 254–55; United States v. Leventhal, 961 F.2d 936, 940 (11th Cir. 1992). Mere legal conclusions or factual allegations, without more, are insufficient. See Clarke, 573 U.S. at 254 (“Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge.”); United States v. Leventhal, 961 F.2d 936, 940 (11th Cir. 1992) (“The burden on the [party contesting an IRS summons] 'is a heavy one,' requiring allegation of specific facts and introduction of evidence.” (internal citations omitted)); see also United States v. Clarke, 816 F.3d 1310, 1318 (11th Cir. 2016) (“Although circumstantial evidence may support a plausible inference, mere conjecture or bare assertion of an improper purpose is not sufficient.” (citing Clarke, 573 U.S. at 254)).

A. The documents and information sought by the IRS summons are relevant.

Clark first attempts to disprove the second Powell factor — i.e., that the inquiry may be relevant to a legitimate purpose. Clark maintains that the underlying complaint at issue in the disciplinary proceeding with the Alabama Real Estate Appraisers Board is not relevant to the IRS's examination of Rock Spring because the appraisal at issue in the disciplinary proceeding was not an appraisal for Rock Spring. Clark incorrectly concludes that the summoned information and documents are not relevant. Clark's argument is cursory and lacks any analysis as to why a disciplinary proceeding against Clark for his conduct as an appraiser “could shed no light” on the correctness of Rock Spring's 2016 tax return given that Rock Spring attached an appraisal that Clark also prepared. (Pet. ¶¶ 15-19).

If “the information sought by an IRS summons 'might throw light upon the correctness of the taxpayer's return,' then it is deemed to be relevant.” La Mura v. United States, 765 F.2d 974, 981 (11th Cir. 1985); see also United States v. Arthur Young & Co., 465 U.S. 805, 813–15 (1984). The government needs to only show that the information it seeks “may be relevant to the purpose” of its investigation. Powell, 379 U.S. at 57-58. The broad language in § 7602 “reflects Congress' express intent to allow the IRS to obtain items of even potential relevance to an ongoing investigation.” Arthur Young & Co., 465 U.S. at 814. The United States meets this minimal relevancy standard, as the documents from Clark's disciplinary proceeding with the Alabama Real Estate Appraisers Board “might throw light” upon the IRS's investigation of Rock Spring.

As shown in the Declarations of Revenue Agents Freeman and Brantly, the summoned documents are relevant to whether Clark is a qualified appraiser and whether Rock Spring obtained a qualified appraisal to substantiate its $23,560,000 non-cash charitable contribution tax deduction. See 26 U.S.C. § 170(f)(11)(E). If Clark is not a “qualified appraiser” and, therefore, his appraisal is not a “qualified appraisal,” then Rock Spring improperly claimed the tax deduction of $23,560,000 on its partnership tax return. To be a “qualified appraiser,” an individual must have “an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements.” 26 U.S.C. § 170(f)(11)(E)(ii)(I). The revocation of Clark's appraisal license drives at the heart of being a “qualified appraiser.” Accordingly, the Alabama Real Estate Appraisers Board file with respect to the disciplinary proceeding against Clark is directly relevant to the IRS's examination of Rock Spring.

Moreover, the complaint and other documentation from the disciplinary proceeding might shed light on the appropriateness of Clark's methodology and valuation which is relevant to whether Rock Spring correctly reported and substantiated the non-cash charitable contribution deduction. For example, the underlying complaint and documentation summonsed from the Alabama Real Estate Appraisers Board should identify the issues it had with Clark's appraisal. Consequently, the summonsed documents and information may shed light on whether Clark made the same or similar errors in appraising Rock Spring's non-cash contribution. Whether these defects exist in the Rock Spring appraisal might impact whether Clark's appraisal for Rock Spring was a “qualified appraisal” or whether the appropriate valuation methodology was utilized. 26 C.F.R. § 1.170A-13(c)(3)(J), (K). As such, the summonsed documents and testimony are relevant to the IRS's examination of Rock Spring.

Clark's efforts to disprove the relevancy of the summonsed documents and information are unavailing. He has wholly failed to meet his “heavy burden” to disprove the relevancy factor required by Powell.

B. Clark Fails to Raise a Plausible Inference that the IRS Summons Was Issued for an Improper Purpose.

Next, Clark attempts to disprove the first Powell factor — i.e., that the summons was issued for a proper purpose — by contending that (1) the IRS issued the administrative summons in an attempt to circumvent discovery in a separate lawsuit that the United States filed against Clark; and (2) the IRS did not first seek to obtain the summoned documents through other means as suggested in the Internal Revenue Manual, section 25.5.1.4. (Pet. ¶ 20–26). But Clark's accusations are nothing but bare conjecture and utterly unsupported by the facts.

First, Clark claims that the IRS summons seeks documents that the United States requested in another case and did not obtain, United States v. Zak et al., 1:18-cv-05774 (N.D. Ga).. (Pet. ¶¶ 20–26). In United States v. Zak et al., the United States sued Clark in the Northern District of Georgia to enjoin him for his role as an appraiser in the organization, promotion, and sale of a conservation easement syndication tax scheme. Clark claims that in response to document requests from the United States in that case, he “objected” and “refused to produce documents” relating to disciplinary proceedings before any appraisal licensing board. (Pet. ¶ 24). That is simply false.

For each document request that Clark identified in his petition to quash, Clark neither objected nor refused to produce those documents in the Georgia case. Instead, as shown below, Clark responded that responsive documents would be produced:

(Declaration of Erin R. Hines, Exhibit 3, ¶ 4).

Indeed, on August 5, 2019 — over four months before the IRS issued the summons — Clark produced a 67-page PDF document to counsel for the United States that contained (i) correspondence to Clark from the Alabama Real Estate Appraisers Board, (ii) a Voluntary Revocation Consent Order signed by Clark and the Alabama Real Estate Appraisers Board, (iii) the complaint filed against Clark, (iv) an appraisal review report commissioned by the Alabama Real Estate Appraisers Board, and (v) Clark's engagement agreement with a lawyer to represent him before the Alabama Real Estate Appraisers Board. (Declaration of Erin R. Hines ¶¶ 5-6). Clark's representations to the Court that he lodged objections and refused to produce documents are simply not true. Any insinuation that counsel for the United States directed the IRS to issue the summons to circumvent discovery in the Georgia case is belied by Clark's own discovery responses and production in United States v. Zak, et al.¹

Additionally, the fact that Clark produced these documents in the Georgia case — which is a separate proceeding in which the United States is represented by the Department of Justice, Tax Division, does not change the analysis of the third requirement of Powell, that the IRS is not already in possession of the documents and information. Regardless of whether possession by the United States through the Department of Justice Tax Division is the same as possession by the IRS, the information and documents sought by the summons is more expansive than what Clark produced in the Georgia case.

In the December 19, 2019 summons, the IRS seeks the Alabama Real Estate Appraiser Board's entire file from its disciplinary proceedings against Clark. This is more expansive than what Clark produced (as identified above). As a result, Clark's production of these documents does not disprove the third Powell factor. See Adamowicz v. United States, 531 F.3d 151, 159 (2d Cir. 2008) (“Although there may be some redundancy between the documents sought and those already produced, that in itself does not require” quashing of the summons); see also United States v. Linsteadt, 724 F.2d 480, 483-84 (5th Cir. 1984) (“[t]he 'already possessed' exception to the enforcement of Internal Revenue summonses is narrowly construed”. And even if the IRS already had received the documents and information from Clark or Rock Spring, the IRS is entitled to summons documents from another source and compare the accuracy of the documents received with those maintained by the Alabama Real Estate Appraisers Board. See United States v. Davis, 636 F.2d 1028, 1037-38 (5th Cir. Feb. 1981) (“[A]ctual possession of or access to information by the IRS is not an absolute bar to enforcement of a summons for that information.”); Liberty Fin. Serv. v. United States, 778 F.2d 1390, 1393 (9th Cir. 1985) (the IRS is entitled to obtain original copies so it may compare for accuracy).

Next, Clark hypothesizes that the summons may have been issued for an improper purpose if the IRS did not first seek to obtain the summoned documents through other means, citing the Internal Revenue Manual, section 25.5.1.4, as support for this claim. At the outset, Clark's specious allegations made solely on his “information and belief” are the exact type of “naked allegations of improper purpose” that are insufficient to rebut the United States' prima facie showing. See Clarke, 573 U.S. at 254. Pure speculation and conjecture without any evidentiary or legal support do not satisfy Clark's heavy burden to present specific facts or circumstances from which the Court may plausibly infer that some wrongful conducted occurred. Id. at 254–55. On this basis alone, the Court should reject Clark's allegations of an improper purpose.

Moreover, the declaration of IRS Revenue Agent Benjamin M. Brantley directly contradicts Clark's “information and belief.” Before issuing the IRS summons at issue, Revenue Agent Brantley first informally requested the information from the Alabama Real Estate Appraisers Board. (Brantley Decl. ¶ 9). However, Revenue Agent Brantley was unable to obtain the information informally — and needed to issue a formal summons to obtain the information and documents. (Id.).

But even if Clark's allegations were true — they are not — Clark has not shown how any failure to comply with the Internal Revenue Manual would amount to an improper purpose. Indeed, courts have rejected this exact same argument in other cases. See, e.g., Sugarloaf Funding, LLC v. United States, 2008 WL 7069016, at *9 (D. Mass. Sept. 9, 2008) (“[I]t is true that the IRS is required to attempt to obtain information voluntarily from taxpayers prior to issuing a summons. I.R.M. § 25.5.1.4. There is little, if any, indication in the record that the IRS failed to comply with this section of the manual. Even if this court were to assume that this was true, it does not reflect an improper purpose or bad faith on the part of the IRS.”); see also Good Karma Trading, LLC v. United States, 2008 WL 4449625, at *10 (D. Colo. May 8, 2008). This is especially true considering that the Internal Revenue Manual does not have the force and effect of law and does not confer rights on taxpayers. See Appenrodt v. United States, 2016 WL 4011317, at *6 (N.D. Cal. July 27, 2016) (“In his petitions, [Petitioner] cites only one valid Internal Revenue Manual section: I.R.M. § 25.5.1.4, which is titled “Factors to consider Before Issuing Summons.” The I.R.M. is not binding law, but does provide guidance to IRS agents. . . .[Attempting to obtain information voluntarily] may be a good practice, but the manual does not provide [Petitioner] with any additional legal rights and it does not change the outcome of this petition.”); see also In re Carlson, 126 F.3d 915, 922 (7th Cir. 1997); Marks v. Comm'r, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991); Keado v. United States, 853 F.2d 1209, 1214 (5th Cir. 1988); Valen Manufacturing Co. v. United States, 90 F.3d 1190, 1194 (6th Cir. 1996). The IRS's failure to comply with the Internal Revenue Manual “does not render an action of the IRS invalid.” In re Carlson, 126 F.3d 915, 922 (7th Cir. 1997).

CONCLUSION

Through the Declarations of IRS Revenue Agents Linda Freeman and Benjamin M. Brantley, the United States has established a prima facie case for enforcement of the IRS summons issued to the Alabama Real Estate Appraiser's Board on December 19, 2019. Clark's petition to quash the IRS summons lacks merit and is riddled with misrepresentations. In short, Clark fails to meet the “heavy burden” required to quash the IRS summons. Accordingly, the Court should summarily deny the petition to quash the December 19, 2019 summons directed to the Alabama Real Estate Appraiser's Board.

Dated: March 19, 2020

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

ERIN R. HINES
Florida Bar No. 44175
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 7238
Washington, D.C. 20044
202-514-6619 (v)
202-514-6770 (f)
Erin.R.Hines@usdoj.gov